Oil Drilling Will Never Be Safe
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Royal Dutch Shell's (NYSE: RDS-A) Kulluk drill ship recently ran aground in the arctic waters off Alaska during a storm. While the impact of the accident seems likely to be less material than previous oil related events, like Exxon's (NYSE: XOM) Valdez disaster or the more recent BP fiasco in the Gulf of Mexico, it has brought out critics that are now demanding that arctic drilling be halted across the board. That's not going to happen, and there's still plenty of money to be made in big oil.
Hard to get
Calls for oil drilling to stop anywhere in the world is problematic because the easy oil has already been found and the world still craves, and needs, so-called black gold to keep moving. Since alternatives aren't economically viable just yet, drilling will have to continue.
That said, oil discoveries are in increasingly hard to reach areas fraught with risk. Getting to these oil reserves is vital for publicly traded oil companies and very expensive. That doesn't mean that investors should avoid the sector, however, because there are some truly exceptional companies in the space that have the knowledge and financial strength to find and deliver oil and, importantly, other energy resources.
Exxon Mobil is one of the largest publicly traded companies in the world and a Dow-30 member. It has a long history of returning value to shareholders via annual dividend increases. It also has the financial strength and technical acumen to drill in some of the most difficult to reach oil fields.
Perhaps the most interesting thing about Exxon, however, is its recent push into the natural gas space. Although buying XTO Energy a few years back may look like a bad decision now that natural gas prices in the United States are plumbing historic lows, Exxon's own projections suggest that long-term demand for gas will increase at a heady pace. The company has the finances to live through the rough patch to the point where the XTO acquisition turns into a money maker, giving the company a nice counterbalance to the increasing difficulty of finding oil.
Unfortunately, Wall Street is well aware of Exxon's industry leading position. Thus it is usually afforded a premium in the market. With a yield around 2.5%, this great company may not be the best option for income seekers, unless sleeping well at night is a primary concern.
Royal Dutch Shell
Royal Dutch Shell is remarkably similar to Exxon, but has a notably higher dividend yield of over 4.5%. It is a large, integrated oil giant that has also aggressively moved into natural gas. Taking into consideration the currently depressed price of natural gas, it is important to note Shell's size and experience in the liquified natural gas space.
That last point is particularly notable, since natural gas has historically been constrained by transportation issues, making it a local or regional commodity, particularly in the United States. With increasing use of liquefaction, the fuel source has become far more portable. Not yet a major factor in the U.S. gas market, it will be eventually, allowing for exportation of natural gas and, likely, increased pricing. Shell not only has years of experience in liquified natural gas, which is used more often in Europe, but it also holds important intellectual property in this increasingly important industry space.
So, while right now the company has some egg on its face in the oil space, natural gas may be a key asset in the future. Its shares and future, however, appear to be bogged down by its exposure to Europe. This fact may make it a good contrarian bet.
Chevron (NYSE: CVX)
Chevron, another Dow-30 member, is also a great option in the oil space. This company, too, has had some recent troubles with oil spills, only in the warmer climate of South America. This comes on top of a long ranging battle with Ecuador that makes a few John Grisham novels look boring.
Still, the company is an important industry participant with material financial resources. Its yield of around 3.3% is lower than Shell's, but higher than Exxon's. While the company isn't on par with Exxon, it is a great company. The slight discount to its fellow Dow member could make it a nice addition to a conservatively focused income portfolio.
Total (NYSE: TOT)
Like Shell, Total also has a great deal of exposure to financially struggling Europe. It, too, is financially strong, however, and should be able to weather any problems that come from the continent's woes. The diamond in the rough here is the company's strong position in the chemicals industry. Moreover, the company has been investing heavily in an effort to find new reserves and also has a notable position in the liquified natural gas space.
Total's efforts to find new reserves has taken it to some interesting places, including countries that have suspect histories when it comes to dealing with outsiders. Russia is one such country, but Total also has notable dealings within Africa and the Middle East. So, a yield that's nearly double Exxon's may make sense. However, if its efforts to gain access to new reserves prove fruitful, investors will likely be well rewarded with dividend increases and share price gains. A bit riskier than the other three companies, Total might be worth a look for more aggressive investors.
Oil isn't going away
No matter how much environmentalists would like to see oil and oil drilling go away, it simply isn't going to happen. The world is too reliant on the fuel source and has too much infrastructure in place to support it. While owning oil companies may not win you friends, it may make you some money over the long term. When disasters strike, the long-term potential usually increases.
ReubenGBrewer has no position in any stocks mentioned. The Motley Fool recommends Chevron Corp and Total SA. (ADR). The Motley Fool owns shares of ExxonMobil Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!